JGB futures hit 2-month high on stock fall, BOJ eyed

* Treasuries rise overnight on bank worries, support JGBs

* Stock fall boosts JGBs' safe-haven appeal

* Caution slips in as 10-yr yield nears 1.5 percent

* BOJ seen leaving rates at 0.5 percent at policy meeting

By Rika Otsuka

TOKYO, July 15 (Reuters) - Japanese government bond futures rose on Tuesday to strike a two-month high as concerns over the U.S. financial sector sparked a stock market sell-off, though caution about a sharp bond rally limited gains.

Market participants rushed to buy JGBs and some speculative players took long positions in early trade following Monday's jump in Treasuries, traders said.

But bond buying soon lost steam as the benchmark yield hit a three-month low, nearing the psychologically important 1.5 percent level, with some investors feeling that the pace of the past month's rally has been too fast.

"The JGB market has risen enough for now, although it may stay volatile in the short term as investors try to digest factors linked to the U.S. rescue plan for mortgage finance firms," said Chotaro Morita, chief-fixed strategist at Barclays Capital.

The U.S. Treasury and Federal Reserve offered emergency cash to troubled mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N) on Sunday, and the Treasury also said it would buy shares in the companies to shore up investor confidence.

September futures 2JGBv1 climbed 0.42 point to 136.49 after reaching 136.60 in early trade, their highest since mid-May.

The benchmark 10-year yield JP10YTN=JBTC was down 4 basis points at 1.540 percent, after hitting a three-month low of 1.535 percent.

The yield has fallen more than 35 basis points since it struck an 11-month peak of 1.895 percent in mid-June. Worries over the U.S. financial sector have trimmed expectations the Fed will raise interest rates in the near term and pave the way for a Bank of Japan interest rate hike later this year.

Investors awaited the announcement of an interest rate decision by the Bank of Japan due later in the day. The central bank is widely expected to leave interest rates on hold at 0.5 percent as it wraps up its two-day meeting on Tuesday.

BOJ Governor Masaaki Shirakawa is to speak at a news conference following the rate decision.

The BOJ is expected to warn that Japan's growth will likely be slower than it had expected a few months ago due to rocketing oil and raw materials prices. [ID:nT155532]

The market is focusing on how bearish the BOJ's economic view turns, analysts said.

"Comments from the BOJ could prompt investors to think the central bank will not raise interest rates for a long time," said Mari Iwashita, senior market economist at Daiwa Securities SMBC.

The two-year yield edged down 1 basis point to 0.755 percent JP2YTN=JBTC, a fresh two-month low.

The five-year yield slipped 1.5 basis points to 1.105 percent JP5YTN=JBTC, after hitting a 2-1/2-month low of 1.085 percent.

The Nikkei share average .n225 was down 1.5 percent by midday, slumping to its lowest levels since early April. [.T]

U.S. Treasuries climbed on Monday in renewed safe-haven bidding as concerns about the banking sector hit stocks and cut expectations the Fed will raise interest rates any time soon. [US/]

(Editing by Sophie Hardach)